New Issue: Electronics for Imaging (EFII) $300 million 0.75% of 2019 Convertible Senior Notes

Jeffrey Alton, CFA and Bill Feingold

Convertible Overview

It was going to be a stretch to get comfortable with this deal on the original terms, and even the reduced premium doesn’t make this bond particularly attractive to model-driven investors because of the stock’s fairly anemic volatility.  That said, with a 22.5% premium, the optics are pretty good.  This bond probably won’t make anybody’s year, but the low premium should allow investors some time to wait for the next leg   higher in the stock.   We would buy it as priced.

Company Overview

Products & Markets

Electronics for Imaging, Inc. (EFII) manufactures commercial digital printers & inks and develops printing efficiency & networking software.  The company’s strategy is to grow revenue through product innovation and selective acquisition of technology to expand its addressable markets and market share.

Current product introductions include a high-volume, near-offset-quality printer which also has the ability to be used in the corrugated-packing segment, a new market for the company. Other new products include an entry-level LED cured printer, a high-resolution technology that does not slow down print speed and 3D ceramic tile printing technology. EFII also recently introduced its fastest printer networking software.

Acquisitions have been mainly software technology businesses or companies that allow further penetration into foreign markets, including printing software in local languages. Executives commented during the most recent quarterly conference call that the company’s M&A pipeline was full with deals larger than in the past. Some of the convertible proceeds are likely earmarked for one or more of those deals.

Financial Performance

Management has a history of solid execution. Through 2015, the company should produce steady single-digit revenue growth and double digit net profit growth. Total revenue in 2013 was $727.7 million and the company’s current market cap is approximately $2 billion.

Revenue ($ millions) by segment for the second quarter 2014 was:

Geographic distribution of revenues is 52% in the Americas, 35% in Europe & the Middle East (EMEA) and 13% in Asia Pacific (APAC). Revenue in the Americas increased 1% during the quarter compared to Q2 2013, EMEA revenue increased 34% and APAC revenue decreased 22%.The European region growth was based on continued investment in the region, an increased headcount and new product introductions. Weakness in China was a result of sluggishness in the company’s Cretaprint product for printing ceramic tiles. The company believes that Chinese customers are reducing investment as concern over grows a slowdown in construction spending.

Cash flow from operations in Q2 2014 was $27.5 million, up 44% over the Q2 2013. Cash flow over the latest 12 months was $81 million, up 6% year-over-year.

For Q3 2014, the company is guiding revenue to $193 to 196 million, which would be an increase of 8 – 10% year-over-year. Growth should be led by the productivity software segment in the mid-teens as some large purchases were pushed back to this quarter from Q2. The company is guiding non-GAAP EPS in the $0.43 - $0.45 per share range, slightly higher than consensus estimates of $0.43 at the time guidance was announced and 10-15% higher than Q3 2013.

Valuation

At over 23 times 2014 net income per share consensus estimate of $1.84 and over 20 times 2015 net income per share consensus estimate of $2.12, the company’s common equity appears fairly, if not fully, valued.  Enterprise Value to EBITDA over the last 12 months is 15.7 times.

Shares currently trade at about $43.50, off a recent high of $47 during earnings season. Resistance is at the 50 day moving average of $44.48 and support is at the 200 day moving average of $41.60. The stock is up from a low of $37 per share last April during the tech/small cap correction.

While EFII is a solid company, we think the stock is consolidating as earnings and cash flow catch up to the stock price. It will take top- and bottom-line results ahead of expectations or a significant acquisition to move the stock meaningfully in the near term.

Leverage

With no current debt on its balance sheet, the timing seems right for EFII to tap a convertible securities market hungry for quality offerings. The company’s balance sheet can easily handle the $300 million convertible securities, with the June 30, 2014 cash & cash equivalents balance over $324 million.